INTERNAL PUBLIC LOANS.

New Zealand Herald, Volume LXIX, Issue 21130, 12 March 1932, Page 13

INTERNAL PUBLIC LOANS.

INTEREST PROCEEDS. REVENUE STAMP DUTY. I RATE NOT MENTIONED. CONVERSION PROPOSAL. MATTER FOR CONFERENCE. ["BY TELEGRAPH. —SPECIAL REPORTER.I WELLINGTON, Friday. Having recommended reductions in salaries and wages in relation to the Public Services and to pensions, believing at the same time that private and local body employees will 6uffer similar reductions, the members of the Commission state that they have experienced difficulty in devising some means whereby equality of sacrifice may be obtained. They feel that the recommendations made are in effect necessary readjustments of money incomes but that 6uch readjustment cannot begin and end at just the classes of incomes mentioned. The Dominion as a whole cannot hope to adhere to the existing level of money incomes irrespective of the value of money and some general basis of adjustment applicable to all classes of income alike must be found. The commission was first of all confronted with the heavy burden of interest on the public debt but could not suggest any basis of adjustment so far as the overseas portion of the debt is concerned. They think, however, that those whose incomes are derived from investments in Government internal loans must of necessity share in the general sacrifice. Adjustment of Burden. The burden of having to pay the same rate of interest, though the value of money is greater, prases just as hardly on the national Budget as it does on trade and industry, and they believe that some adjustment of the interest burden of the State so far as it relates to the internal debt must be found. ~ , In a table the Commission shows that the total amount of loans raised by the Government from internal sources is £115,000,000 and that the annual interest charge on the debt is £5,300,000. A considerable sum has been raised in Mew Zealand by the issue of loans,, the interest from which is free from income tax. The interest payable on the income tax free securities is £1,400,000, and on other securities £3,900,000. The commission then points out that there are two methods whereby assistance toward the budgetary position may be obtained in regard to interest on the internal public debt. These are (1) by a revenue stamp duty on coupons and interest warrants and (2) by a voluntary conversion loan. They deal with the advantages and disadvantages in respect of each of these methods. Advantages o! Methods. They give as the advantages of the revenue stamp duty method that the duty could be put into operation immediately, that there would be no costs involved and that the duty could be purely of an emergency character and could be lifted wholly or in part as prosperity returned. A general fall in the interest level was vital to the revival of trade and industry in the Dominion, and the disadvantage of such a charge, particularly on a permanent basis, was that it would fail to bring about this result. The position of national finance was, however, so acute that the commission suggested the advisability of a charge in the nature of a special emergency stamp duty on the interest of all internal loans bearing interest at 41; per cent, or oyer. They are of opinion that the question of taxation is one outside the order of reference of the Commission, and do not venture to suggest the rate of stamp duty which should be imposed. It should, however, be a rate commensurate with the sacrifice demanded of other classes of income. They state that the disadvantages of a conversion loan are that considerable cost is involved in the process of conversion. Immediate relief to the Consolidated Fund would not be possible, as probably at least three months would he required to complete negotiations, and that it would penalise investors for the whole duration of the loans.

Thf! advantage is that conversion would give relief to the Consolidated Fund over n long period and would tend to reduce tli© general interest-level. They believe that the Government should carefully consider the possibility of making an appeal to investors to convert their securities into loans carrying a reduced rate of interest. Immediate Relief to State. " In effect, we recommend a combination of stamp duty and conversion, mainly because by this means immediate relief to the Consolidated Fund can be obtained," continues the. report. "We suggest, first of all, that the Government should at once call a conference of representatives of the leading financial institutions, the press, and representative brokers, with a view to gauging whether a conversion issue would be likely to meet with success. Nothing would be more fatal to our credit than an unsuccessful conversion scheme, and we could not suggest an immediate appeal unless the probability of success had first been gauged. " As a basis for consideration of a conversion scheme, we suggest a general reduction in interest ori all internal loans bearing interest at per cent, or over, of 15 per cent, (that is 3s in the £1). If such an appeal be it should be preceded by a full statement of the financial position of the Dominion, and, in particular, of the budgetary position for 1932-33, and we believe that, if properly organised, a successful termination to a conversion scheme might be anticipated. If a conversion scheme be decided upon, advantage should be taken of the occasion to arrange suitable maturity dates, in order fo eliminate problems of redemption for some years to come. We suggest also that an option should be given to the holders of taxfree loans to convert into taxable loans at such premium or higher rate of interest. as might be considered equitable. Tho annual gross saving in interest on the basis suggested above is estimated at £564.000. Debt Held By Departments. " Before passing from this phase of the subject we would refer to the large amount of the public debt held by State departments, principally the Post. Office, State Fire Office, Public Trust Office, Government Life Insurance Office, and various Treasury accounts. The amount of (lie debt so hold is £53,270,000. Of t liis, the post office holds £46,046,000, of which, however, £37.911,000 bears interest at 4 per cent, or less. The reduction suggested, would, therefore, affect only £8.135,000 of the debt so held. The loss in interest on this amount would be reflected i:i '.educed post office profits (subject, however, to any saving which might be effected by a reduction in the rate of interest paid to depositors), §nd, as post office profits are paid into the Consolidated Fund, the reduction would, in effect, be a chargo on that fund. Any losses of interest on public debt held by the Public Trust Office, the Government Life Insurance Office and the State Fire Insurance Office, should be borne by the respective departments. The amount of the debt held by Treasury accounts is relatively small and need not be separately considered."

Dealing with the question of interest on mortgages, debentures, deposits, dividends from preference shares, etc., the members of the Commission express the view that as 'the interest charge on securities of this nature does not affect the public expenditure, the matter does not come within their order of reference. They feel, however, that they would be failing in their duty were they to make no reference whatever to the matter. " Private compositions affecting both principal and interest are being arranged daily, but, in our view, a general change such as is contemplated cannot he left altogether to natural economic forces to bring about as such a policy may under present conditions be too slow in operation and may not result in an equal all-round adjustment. We feel, therefore, that it would be reasonable to widen the scope of the existing legislation in order to accelerate the private compositions referredto. We do not feel that it is our duty to suggest the nature and form the legislation should take. It should, however, aim at the policy we have advocated from the outset —that is, equality of sacrifice, and a general levelling-down of costs of production. It would ba necessary in drafting the legislation to make provision for a special Court of equity to consider applications by mortgagors or mortgagees, and the aim should be to make the process as simple and inexpensive as possible. " Mortgagees and others whose incomes are derived from fixed investments cannot hope to escape a comparable and equitable coritribution. to the general sacrifice which it has been suggested should be imposed on holders of public securities. To permit them to do so would be unjust and give ground for complaint that one class of investor had been penalised, and the State as a borrower would be seriously prejudiced. Cognisance must be taken of . the fact that the burden imposed by mortgage charges based on inflated values is impossible.' A reduction of interest, necessary as it may be in the meantime, is merely a palliative, and in many cases will prove futile. The allimportant question of capital values is involved. A reduction in the rate of interest from, say, 7 to even 4 per cent, is not going to help a borrower who has a mortgage of £IO,OOO on a property which to-day will not produce sufficient to enable him to pay the reduced rate on £SOOO, or even less. Finally, there is one further class of fixed income to which we must refer, and that is the incomes of those who hold local-body securities domiciled in the Dominion. There must be some adjustment in incomes of this nature, and we accordingly suggest the imposition of a special stamp duty in the meantime as a means of relieving the burden of local rates, to be followed later by a conversion scheme such as we have outlined in respect of the internal public debt."

DISSENTING OPINIONS. VIEWS OF THREE MEMBERS. GUARDING AGAINST INEQUALITY. ["BY TELEGRAPH.—SPECIAL REPORTER.] WELLINGTON. Friday. Certain reservations in respfect of the section of tho report dealing with fixed incomes are made by two members of the commission, Messrs. J. Begg and J. L. Griffin, who append their signatures to a minority report. While they agree with much that has been stated in the report and particularly with the stated object' of securing some general basis of adjustment, applicable to all classes alike, they do not agree with all the conclusions nor do they think that the proposals set out would fully or speedily achieve the object in view. They stress the opinion that a reduction in the effective net rate of interest received by investors in Government and local body securities, whether this be effected by special taxation or otherwise, would be inequitable if unaccompanied by a similar reduction in the case of other investors. Suggestion For Conference. In this minority report, it is recommended that an early opportunity be taken of conferring with representatives of leading financial institutions, brokers, etc., with a view to launching a conversion scheme on the basis of a reduction of interest by 20 per cent., but so that in no case should the rate of interest be reduced below 4 per cent., in the case of loans the income from which is subject to taxation, or below £3 12s per cent.— that is per cent, less 20 per cent in the case of loans the income from which is free from income tax. They consider also that an option should be given to the holders of tax r free loans to convert into taxable loans at a premium or suitably increased rate of interest. If such a conversion scheme could be brought to a successful conclusion the annual gross saving in interest is estimated at £730.089. These members point out that the question' of interest on loans from State lending departrpents must be considered. Any reductions brought about in the interest rate paid by the Government must lead to the consideration of reductions to those who have borrowed from the State lending departments. Assuming a reduction of 20 per cent, in the rate of interest payable on loans from State lending departments, with a proviso that in no case shall the resultant rate of interest be lower than 5 per cent., they estimate the loss to the State Advances Department at £224,658, and of the Land and Survey Department at £31,732. In addition to this, losses would be incurred by other departments, and in their opinion these losses should be absorbed by these departments, and should not be a charge against the Consolidated Fund. In the case of the three superannuation funds the reports disclose that they are actuarially unsound. Any loss of interest on their investments must, therefore, ultimately fall on the Consolidated Fund. Tax on Interest Opposed. Although not provided for in the order of reference, they suggest that as in many cases the incomes of those affected directly and indirectly by the reductions recommended in the case of salaries, wages and pensions, are subject to fixed charges in the form of interest and rent, these reductions should be accompanied bv reductions in interest and rent charges. . , >r . Iri a further minority report, Mr. A. Macintosh states that he is decidedly opposed to a tax on interest, at all events to the extortionate extent of 20 per cent., or 4s in the pound, recommended by tho Economists' Committee. This, if mado permanent —a not unlikely event, having regard to various forms of taxation imposed in recent years heralded as -"temporary" and still in force—would prove an intolerable burden. He regards this form of taxation as possessing all the elements of confiscation and could bo justified only by expediency and tho exigencies of the situation. A tax of this nature would undoubtedly inflict lasting injury on the credit and good name of the Dominion, and would press with undue severity on many people of moderate means who have, in all good faith, invested their hard-earned savings in securities issued by the State, the interest on which constitutes their main—if not their only—source of income. To this burden must be added the loss to be incurred by depreciation of holdings, the inevitable consequence of reduced interest. Under such a staggering double blow the euphonious phrase "equality of sacrifice'/ was quite out ot Pl Mr. Macintosh was of the opinion that a voluntary conversion loan was equally open to objections. The proposal, in_ effect an effort to compromise with creditorsan act of bankruptcy, he said postdated a unanimous response. Failu this important objective must end n abandonment. Consequently grave injury to the public credit would ,resul . use of the term "voluntary in tins connection and in such circumstances woul4 be merely ft pretenc#. ■, -